Will Microsoft Earnings Power Up MSFT Stock? 3 Things to Watch

by Jonathan Berr | October 22, 2013 6:05 am

Microsoft (MSFT[1]) posted its biggest earnings miss in recent memory[2] last quarter. But MSFT stock will get another chance to get back in Wall Street’s good graces when Microsoft earnings are released later today.

Last quarter, Microsoft earnings came in wildly under expectations, thanks in part to a $900 million charge on the MSFT Surface Tablet.

This quarter, revenue at MSFT expected to hit $17.78 billion, an increase of 11% on a year-over-year basis. Meanwhile, Microsoft earnings per share are supposed to be 54 cents vs. 53 cents in the year earlier period.

Let’s take a look at three things MSFT investors should be watching in the upcoming Microsoft earnings report.

The Cloud

Microsoft stock investors will be keenly interested in how well MSFT did in its cloud business. Raymond James analyst Michael Turtis thinks MSFT has seen a slowdown[3] in this area. He kept his “market perform” rating on Microsoft stock but lowered his estimates. But Jefferies analyst Ross MacMillan upgraded Microsoft stock[4] because he thinks MSFT is gaining ground in this area.

And columnist Eric Knorr recently agreed in InfoWorld[5], writing:

“What other company in the world has such a massive collection of software and services to offer through the cloud, not to mention the cloud infrastructure to deliver it? Microsoft has the resources to crush it. The question, as usual, is how well it can execute.”

Today’s Microsoft earnings report will offer MSFT investors the first clue on its cloud execution.

Gaming

Another potential area of growth for Microsoft stock is gaming. The XBox One is due be launched in late November for 13 big markets including the U.S. Unfortunately, Sony (SNE[6])[7] is unveiling its PlayStation4 at around the same time, which will create fierce competition between MSFT and SNE during the holidays.

But marketers are excited about the MSFT XBox One. As an article in Advertising Age[8] put it:

“Xbox One can essentially work like TV that watches you, potentially bringing marketers a huge new trove of data about what’s going on in living rooms, including, as one marketer put it after the speech, unprecedented information about how people engage with TV advertising.”

And some users seem excited, too. As of early September, for example, a senior MSFT executive had said many pre-order supplies were already sold out[9].

Microsoft stock investors should listen closely for any hard numbers about how pre-order of the Xbox One are going.

MSFT Stock Valuation

Another thing to note heading into the Microsoft earnings report: Shares of Microsoft stock have been cheap for years and remain that way. MSFT stock currently trades at an inexpensive P/E ratio of 13.6, which is right around its five-year average and far below the sector average of 24, according to Reuters[10].

That’s not bad considering MSFT pays a a fat and reliable dividend of 3.2% and that Microsoft stock is already beating the market year-to-date. In fact, the stock is up more than 12% since the start of September … shortly after the announcement of CEO Steve Ballmer’s coming departure.

With that in mind, it might not take much in terms of Microsoft earnings for MSFT stock to finally gained some traction just as Ballmer is being shown the door.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.